India's Monsoon Politics

UNCLAS NEW DELHI 001754 INFO AMCONSUL KOLKATA PRIORITY AMCONSUL CHENNAI PRIORITY AMCONSUL MUMBAI PRIORITY AMCONSUL HYDERABAD PRIORITY USDA FAS WASHDC PRIORITY USDOC WASHDC SENSITIVE E.O. 12958: N/A TAGS: EAGR ECON ETRD PGOV WTRO IN SUBJECT: India's Monsoon Politics ¶1. (SBU) Summary: The Indian government (GOI) is trying to manage a poor monsoon season expected to result in low yields in rice, sugar cane, oilseeds and other crops. Between rising food prices and burdensome subsidy costs, the Food and Agriculture Minister and United Progressive Alliance (UPA) government face growing criticism from both the Left and the Right. While trying to shift the blame on state governments' inability to deliver on programs for alternative crops and irrigation schemes, the central government has invoked the draconian "Essential Commodities Act" which allows it to seize private stocks. It has procured sugar on the world market --sending global prices skyrocketing. Next GOI actions likely include: a broad (and expensive) social safety net for farmers including further farm loan waivers; a delay in the UPA's election promise of enacting a National Food Security law within 100 days of coming into power; and increasing government intervention in Indian agriculture and food markets. The impact of a poor monsoon on overall agricultural production - while technically manageable - could retard India's GDP growth in 2009/10. End summary. The 2009 "Truant" Monsoon... -------------- ¶2. (SBU) Both the U.S. Department of Agriculture and the Indian government estimate 2009 monsoon rainfall at roughly 70-80 percent of "normal." Late and patchy rains are likely to result in poor "kharif" season crops, with rice production forecast to be hit the hardest. Sugar cane and oilseeds are also suffering from lack of rain. The Indian Meteorological Department (IMD) has been highly criticized for bad forecasting this season as well as poor communication with farmers making critical planting decisions. Over 60 percent of Indian food crops depend on annual monsoon rains. The remaining 40 percent under irrigated cropland also depend on monsoon rains to replenish the water table. Falling water table levels have led to increased energy use to pump water from deeper (and deeper) wells. Leads to Harsh Criticism of Ag Minister -------------- ¶3. (SBU) Minister Sharad Pawar holds the dual portfolio of Minster of Food and Agriculture just as he did in the previous UPA government. In key cabinet meetings last week and in the recent �00A;session of Parliament, Pawar was on the defensive, trying to explain why the rural sector was not better prepared to ride out a dry season. Critics say Pawar neglected extension programs for farmers, failed to push irrigation schemes and delayed development and delivery of new (drought resistant) seed varieties to farmers. Government Enters the Market -------------- ¶4. (U) In an effort to control rising food price inflation, the Indian government has entered the world market to purchase sugar and pulses (peas, beans and lentils). The Food Corporation of India and other parastatal trading companies are procuring essential commodities in significant quantities. Sugar purchases by parastatals and private trade have sent world prices soaring. Recent media reports indicate that the GOI is keen to enter government-to-government deals to ensure sufficient supplies of pulses. Large quantities of pulses are being imported by government parastatals from Canada and Burma. ... Food Prices Continue to Edge Upward -------------- ¶5. (U) Rising food prices continue to pose a serious political problem for the government. India's wholesale price index-based inflation has declined after peaking at around 13 percent one year ago. Food price inflation continues to hover at around 10 percent. According to experts, the wholesale price index-based inflation does not capture the full impact of food price increases as the food group weight in the index is only around 15 percent. The consumer price index-based inflation, which is a more realistic indicator of the food price inflation, has been hovering at around 13 percent in recent months. As food spending typically accounts for around 50 percent of an Aam Aadmi's (common man's) family budget in India, the high food prices have eroded purchasing power, posing a further challenge to government efforts to address food and nutrition security. (U) In the light of a significant decline in agricultural production due to the poor monsoon, the GOI's Central Statistical Organization is likely to revise its estimate for agricultural growth down from the expected 3 percent. This could have a negative impact on India's relatively vibrant economic growth rate of 6-7 percent. In an emergency meeting of Chief Ministers called on August 17, the Prime Minister emphasized a crack-down on "hoarding and speculating" of commodities. The Finance Minister has also weighed in to assure Indians that drinking water supplies will guaranteed and urged citizens not to panic. No Exports, "Election" Stocks Held by GOI -------------- ¶6. (SBU) The central government is sitting on record levels of wheat and rice that were accumulated after two good, back-to-back monsoons supported by high guarantee prices. During the run-up to the 2009 elections, Ag Minister Pawar oversaw massive purchases of wheat and rice into the state-held warehouses across the country. In fact, the Indian government has purchased over 32 million tons of rice and 25 million tons of wheat (roughly equal to the combined harvests of Argentina and Australia). At present, exports of wheat and rice are banned (except for a very small amount of high-priced basmati rice). Media rumors suggest that the government may ban exports of other food items - such as vegetables-if prices continue to rise. Originally, the government planned to move the accumulated wheat/rice stocks to below-poverty line citizens under proposed national food security legislation. The Congress Party still hopes to fulfill an election promise of providing 25 kilograms of rice/wheat per month per family at a highly subsidized price of Rs. 3/ kilo. However, until a full assessment of the new crop can be undertaken, the food security legislation is on hold. Blame the States.... -------------- ¶7. (SBU) As political pressure mounts, and food inflation creeps up, the Congress party has been trying to place the blame for the drought situation on state governments. Lack of long term planning, especially for irrigation infrastructure and alternative crops are the two key criticisms. From the Left, the government is fending off accusations of having allowed speculation in food prices. Citing "abnormal profits," the central government has also invoked the draconian Essential Commodities Act allowing the government to seize privately-held food stocks, if necessary. ....Expand Social Safety Net Programs -------------- ¶8. (U) Ag Minster Pawar has called a meeting of key government officials on August 19 to review the national situation both from a stocks perspective and to prepare for the second seasonal "rabi" crop to be planted in October/November. In his Independence Day speech on August 15, the Prime Minster promised support to farmers. Already, large scale social safety net programs such as the flagship National Rural Employment Guarantee Program are being expanded around the country. The Food and Ag Subsidy Balloons -------------- ¶9. (SBU) As the GOI moves to support farmers with loan waivers, cheap credit and inputs, it is struggling with a growing subsidy bill. New steps likely to add to the GOI's $32 billion food and agriculture subsidy cost include a proposed further farm loan waiver, a diesel subsidy for irrigation and free food to drought-hit states. The government will soon need to take a decision on new crop support prices. The official minimum support prices for fall harvested crops will be watched closely by both farmers and traders in the context of the emerging drought situation. Comment: -------------- ¶10. (SBU) A significant decline in India's agricultural production following a poor monsoon exposes the vulnerability of Indian agriculture to vagaries of weather. The GOI has done little long term work to hedge against any such significant redline in agricultural production. Low or negative agricultural growth could temper India's overall economic growth this fiscal year, which is already under pressure from the global recession. India's political approach to "monsoon" management in 2009 will drive up global food prices due to the GOI's knee jerk tendency to intervene in the markets. The poor monsoon and food price rises pose some short term political challenges for the government. There are state assembly elections coming up in Maharashtra and Haryana, two politically important states. It is clear from the Prime Minister's direct interventions that the government is feeling the heat at the moment. All Indian politicians are acutely mindful of the sensitivity of the Indian voter to food prices. In this context, Sharad Pawar is particularly on the hotseat because not only is he the Food and Agriculture Minister but also from Maharashtra and closely associated with sugar, which leads the list of food products with rising prices. But, the government can take comfort in the fact one erratic monsoon will not cause lasting political damage and the general election is still more than four years away. The UPA government remains frantic in its defense of drought management. The upcoming Maharashtra State election will allow the media and political parties to exacerbate the price rise issue. Key issues like how to reinvigorate growth in the ag sector and how to re-orient agricultural research and education will have to wait until the political storm -and monsoon blues -are over. ROEMER